FY 2011 Wrapped Up, Still More Bumps on the Budget Road Ahead

4/19/2011

Even though the fiscal year (FY) 2011 budget battles are over, Congress is still deeply mired in fiscal work. News about "the budget" continues to flood the airwaves, along with breathless reporting about the impending debt ceiling crisis as federal debt levels reach their statutory limits. Incredibly large numbers are part of each new report, leaving many to wonder what's in the offing for fiscal policy in the coming months.

The FY 2012 Budget

Although President Obama released a long-term budget plan during the week of April 11, his official budget request for FY 2012 remains the one he released in February. The February budget sets out the president's policy priorities for the next fiscal year, although Congress often ignores it and only uses it as a benchmark for the legislative branch's own budget plans.

The policy highlights of Obama's FY 2012 budget are focused on a spate of high-profile spending cuts, including steep reductions to the Low Income Home Energy Assistance Program (LIHEAP) and a five-year non-security discretionary spending freeze. His overall spending levels reflected these cuts, and he called for only $3.729 trillion in spending, almost $100 billion less than what the Office of Management and Budget (OMB) predicted for FY 2011 levels (before the final continuing resolution was passed), with $456 billion going to non-defense discretionary items, a $50 billion decrease from FY 2011 estimates.

The FY 2012 budget battle became heated with the release of the House Budget Resolution, authored by House Budget Committee Chair Paul Ryan (R-WI). With a staggering $6 trillion in cuts over the next decade compared to Obama's budget, Ryan's proposal immediately grabbed headlines, most notably for its plans to turn Medicare into a voucher program and to convert Medicaid into a block grant to the states, resulting in $771 billion in cuts (over ten years) to the health care programs for low-income, elderly, and disabled Americans.

Despite all the flash surrounding its release, Ryan's proposal simply sets the top-line numbers of the budget, leaving many questions as to which non-defense discretionary programs would be subject to the $4 trillion in spending cuts (over ten years) called for in the budget resolution. The proposal sets a ceiling for spending and a floor for revenue for the next ten years. Any bills that violate either the ceiling or the floor are subject to a point of order in both houses of Congress, blocking the bill's passage (although points of order can be waived). However, since revenue and mandatory spending levels are written into law and do not have to be voted on every year, the budget resolution is most important for setting discretionary spending levels, which are then carried out through the yearly appropriations process.

Looking at the FY 2012 numbers, Ryan's budget remains substantially different from Obama's. With $3.529 trillion in total spending, Ryan cuts about $200 billion relative to Obama's 2012 budget. But the cuts are lopsidedly focused on only two areas: a handful of mandatory programs (including the Supplemental Nutrition Assistance Program (formerly Food Stamps) and higher education spending) and non-defense discretionary spending. The funding levels for these areas are slashed deeply, accounting for 88 percent of the savings in his FY 2012 budget. Everything else either sees relatively small cuts, or, in the case of Social Security and defense, sees no cuts compared to the president's budget.

More importantly, Obama rebutted Ryan's plan by releasing his own long-term budget plan in a widely covered speech only days after Ryan unveiled his budget resolution. Obama's plan, too, has impressive sounding numbers, with the president calling for $4 trillion in deficit reduction over twelve years: $2 trillion from spending cuts, $1 trillion from tax reform, and $1 trillion from saved interest payments on the national debt.

However, Obama's plan contains few specifics. Unlike his February budget or Ryan's budget resolution, it does not include top-line numbers for FY 2012 or the following years. Since his plan was basically a speech, it represents the principles Obama wants to see enacted over the next decade. He said he wants to "keep annual domestic spending low," "find additional savings in our defense budget," "further reduce health care spending," and "reduce spending in the tax code." Additionally, there's a "debt failsafe," where, "[i]f, by 2014, our debt is not projected to fall as a share of the economy, then my plan will require us to come together and make up the additional savings with more spending cuts and more spending reductions in the tax code."

Obama did draw some stark, specific differences with the Ryan budget plan. First, Obama said any long-term budget reform required a mix of spending cuts and revenue increases; Ryan did not address revenue increases. Obama once again said he does not want to renew the upper-income Bush tax cuts, a proposal that seems to be widely supported in polls and would raise about $1 trillion. He also called for reforming the tax system, eliminating many tax loopholes, deductions, and credits.

Second, Obama drew a line in the sand on Medicare. While he called for reforms to lower costs, he strongly opposed shifting from a benefits program to an insurance program where individuals would receive vouchers to buy coverage, as proposed by Ryan.

Third, unlike Ryan’s plan, Obama’s would protect most low-income programs. The president argued that the country should not balance the budget on the backs of those most in need. Finally, Obama said he doesn't want to touch Social Security.

Republicans were taken aback by Obama's speech. They seemed to expect an olive branch in light of the recent compromises to complete the stop-gap spending bill for the current fiscal year. Instead, the rhetoric angered some Republicans, who immediately denounced the idea of increasing revenue to pay for deficit reduction.

Progressives seemed to be equally surprised by the speech. They wanted the president to focus on job creation instead of deficit reduction. However, within the context of a deficit reduction speech, many were pleased that the president identified key priorities to preserve.

It is clear that there are considerable differences between House Republicans and the president. About the only item there seems to be agreement on is no increase in non-security discretionary spending in the FY 2012 budget. Republicans now want Obama to specify what programs would be cut in the discretionary budget. Some congressional Republicans are even calling for Obama to release a new, official FY 2012 budget in light of his speech, but it is unlikely that he will do so.

The Debate on the Debt Ceiling and Implications for the Budget

The collision between Ryan's policy proposals and Obama's new long-term budget plan may take place as part of the debt ceiling debate. With federal borrowing rapidly approaching the $14.294 trillion debt limit, Republicans are demanding concessions in exchange for voting to raise the ceiling. According to the Treasury Department, the debt limit is likely to be exceeded by May 16. Treasury can use various maneuvers to delay default until around July 8.

The Obama administration has said the vote on the debt ceiling should be separate from the debate on deficit reduction. Obama created a new deficit reduction panel, to be hosted by Vice President Joe Biden, that will meet on May 5 and involve House and Senate leaders. The goal of the panel will be to continue discussions about a legislative framework for long-term budget issues.

It remains unclear whether Republicans are willing to separate deficit reduction from the debt ceiling issue. Sen. Marco Rubio (R-FL), a Tea Party favorite, may have sent a strong signal when he said he would not vote for a debit ceiling increase unless it had "a plan for fundamental tax reform, an overhaul of our regulatory structure, a cut to discretionary spending, a balanced-budget amendment, and reforms to save Social Security, Medicare, and Medicaid."